Shifting the responsibility to procure insurance coverage to a business partner is a useful strategy for reducing insurance costs, but it is not without risk. Relying solely on the resulting certificate of insurance can be problematic. If commercial property/casualty insurance coverage is not in place as anticipated, or otherwise fails to respond as anticipated to a loss because of an unknown coverage limitation, the firm may find itself unexpectedly underinsured.

For example, in Sterett Construction v. AmSouth Steel Erectors, et al., Sterett leased a crane to AmSouth. The terms of the lease agreement required AmSouth to procure insurance coverage for the crane. Thus, AmSouth was the policyholder and Sterett was the certificate holder. While a copy of the actual insurance policy customarily is delivered to the policyholder, it is not usually delivered to the certificate holder. Consequently, Sterett did not receive a copy of the insurance policy, which indicated that coverage was provided for the crane subject to a deductible of $25,000. Rather, Sterett received a certificate of insurance simply confirming that insurance coverage had been procured for the crane. This certificate erroneously indicated that the coverage for the crane was subject to a deductible of $1,000. AmSouth negligently operated the crane, resulting in damages to the crane in excess of $25,000. Because the crane was in AmSouth?s care, custody and control, its general liability coverage was inapplicable. Furthermore, AmSouth was judgment proof because it was bankrupt and no longer operating. For this reason, Sterett was forced to file a lawsuit against both the producer and the insurer in an attempt to recover its uncovered loss of $24,000 (i.e., the difference between the deductible identified in its certificate of insurance, and the actual deductible identified in the applicable insurance policy).

While cases of this type are relatively rare, when they do occur, the result can be a substantial uncovered loss. Firms like Sterett that rely on numerous business partners to procure insurance coverage for its benefit must be mindful of potential pitfalls that can arise in relying on a certificate of insurance. 

Certificates of Insurance
A certificate of insurance confirms that a business partner has fulfilled an agreement to procure insurance coverage. It contains basic coverage data including, for example, the identification of the insured and the certificate holder, the policy limit, the deductible, the identification of the producer and insurer, the inception and expiration dates of the insurance policy, the type of insurance that is applicable (e.g., general liability, workers compensation and employers liability, contractor?s equipment inland marine), and the policy numbers of the insurance policies to which it refers. Two problems can arise in conjunction with a certificate of insurance, however, that can lead to an uncovered loss. 

• Producers are often assigned the task of completing and issuing the certificate of insurance on behalf of the insurer. Unfortunately, the coverage data contained in the certificate may not match the corresponding coverage data contained in the insurance policy, or it may contain data suggesting the absence of a particular coverage limitation that is contained in the insurance policy. For example, as we saw earlier, a certificate of insurance may confirm that an inland marine policy was issued to the insured under which coverage is provided for a crane subject to a deductible of $1,000 while the policy may stipulate that coverage is provided for the crane subject to a deductible of $25,000.
• Because a certificate of insurance is a summary document that is intended only to provide evidence of insurance coverage, it does not disclose all of the coverage limitations that are contained in the insurance policy. Important exclusions that severely restrict coverage may not be disclosed on the certificate of insurance. For example, a motor cargo policy procured by a carrier under which the cargo of a shipper is insured while in transit may contain an unattended vehicle theft exclusion that is not disclosed on the certificate of insurance. The shipper may not learn of this exclusion until cargo is stolen while the driver is in a truck stop taking a break.

Of course, insurers are well aware of these issues, so a certificate of insurance typically contains a disclaimer that stipulates that a certificate of insurance is issued for information purposes only and confers no legal rights upon the certificate holder. The certificate does not amend, extend or alter the coverage afforded by the insurance policy. Unless a certificate holder has substantial clout in the insurance marketplace, use of a preprinted certificate of insurance that is drafted by the certificate holder and does not contain a disclaimer is not an option. 

Is Litigation an Effective Response to an Uncovered Loss?
Assuming that the certificate of insurance contains a disclaimer, litigation may or may not be an effective response to an uncovered loss. If the certificate of insurance does not contain coverage data (1) that is diametrically different than the coverage data contained in the insurance policy, or (2) from which the certificate holder could infer that the insurance policy does not contain a particular coverage limitation, one may not reasonably argue that the insurer is prohibited from relying upon this particular coverage limitation. An insurer cannot be reasonably expected to disclose on the certificate of insurance all of the coverage limitations contained in the insurance policy. If all of the coverage limitations contained in the insurance policy were disclosed in the certificate, it would become cumbersome and lose its value as a summary document intended merely to confirm that an agreement to procure insurance coverage has been fulfilled. Thus, in these types of cases, the courts have uniformly held that the insurer did not have a duty to disclose in the certificate of insurance the particular coverage limitation upon which it now relies in its determination that coverage is inapplicable. 

On the other hand, if the certificate of insurance does contain coverage data (1) that is diametrically different than the coverage data contained in the insurance policy, or (2) from which the certificate holder could infer that the insurance policy does not contain a particular coverage limitation, the prospect for success in litigation depends on the jurisdiction in question. In some jurisdictions, the courts have held that the certificate holder alone bears responsibility for failing to discover and rectify a discrepancy between the certificate of insurance and the insurance policy. In these cases, the courts have reasoned that the disclaimer effectively puts the certificate holder on notice that the insurance policy is controlling. These courts have further reasoned that the certificate holder has a duty to examine carefully the insurance policy when it is issued, in which case a discrepancy can be discovered and rectified before a loss. In a number of jurisdictions, however, legal precedent does not exist that addresses this particular issue. A compelling case can be made that both the producer who completed and issued the certificate of insurance on behalf of the insurer, and the insurer bear substantial responsibility for the discrepancy. 

First, in providing risk management services to clients who have agreed to procure insurance coverage for the benefit of a business partner, the custom and practice is for a retail insurance agent to confirm that data contained in the certificate of insurance matches the corresponding data contained in the insurance policy. Verifying the accuracy of data contained in the certificate of insurance is a value-added service offered by a retail insurance agent for the benefit of clients who have agreed to procure insurance coverage for the benefit of a business partner. 

Second, an insurer knows that furnishing a certificate of insurance is an integral component of the insurance transaction; the servicing of an insurance policy not only includes actual delivery of a certificate of insurance confirming that a client has fulfilled an agreement to procure insurance coverage, but also includes the verification of the accuracy of the data contained in the certificate. While an insurer may opt to shift this administrative burden to the producer and thereby receive a substantial benefit in the form of reduced administrative costs, it cannot escape the non-delegable obligation that it assumes when it issues an insurance policy to a client. 

Third, the certificate holder reasonably relies on both the producer and the insurer to verify the accuracy of the data contained in the certificate of insurance and, therefore, it bears minimal, if any, responsibility for its omission in not requesting a copy of the insurance policy so that it could engage in a painstaking analysis to be sure that the certificate was accurately completed. At least one court has been receptive to the notion that responsibility for a discrepancy ought not be put on the certificate holder, even though the certificate of insurance contained a disclaimer.

Clearly, while the law is unsettled in a number of jurisdictions in terms of how a court likely would respond to a case in which there is a discrepancy between the certificate of insurance and the insurance policy, certificate holders should be proactive before a loss occurs rather than rely on litigation to be an effective response after an uncovered loss occurs.

Proceed with Caution
In relying on a business partner to procure insurance coverage, a certificate holder should keep in mind the following caveats:

• Given the numerous coverage limitations that often encumber an insurance policy, those who take a certificate of insurance at face value do so at their own risk. A certificate of insurance is only evidence of insurance coverage and should not be relied upon by a certificate holder for the full terms of the insurance policy. For this reason, a certificate holder should not only insist on receiving a copy of the insurance policy, but also should scrutinize carefully the coverage limitations contained in it. Often a coverage limitation can be deleted with an endorsement for an additional premium. Most importantly, the law is well settled in those cases where there is no information contained in the certificate of insurance upon which the certificate holder could reasonably deduce or infer that the coverage limitation relied upon by the insurer in asserting an unfavorable coverage position was not contained in the insurance policy. In these type of cases, the courts have uniformly held that the insurer did not have a duty to disclose in the certificate of insurance the particular coverage limitation upon which it now relies in its determination that coverage is inapplicable.
• Depending on the jurisdiction, a successful outcome in litigation against the producer and insurer in those cases where there is a conflict between the certificate of insurance and the insurance policy, or at least there is a factual question concerning the conflict issue, is possible. While a certificate holder is unlikely to prevail in such a case as a matter of law (i.e., issues pertaining to custom and practice are inherently factual in nature), there is a reasonable prospect that a motion for summary judgment filed by a producer or insurer can be defeated, in which case a settlement can be negotiated.

Assuming that these caveats are kept in mind by the certificate holder, relying on certificates of insurance is a viable option for reducing insurance costs.

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Written by: William J. Warfel & Stanley R. Adamson

William J. Warfel, Ph.D., CPCU, CLU, is professor of insurance and risk management at Indiana State University. He is a frequent contributor to Risk Management and has been retained as an expert witness in more than 50 cases. His specialty includes breach of contract, bad faith and agent/broker liability issues. 

Stanley R.  Adamson, Ph.D., is the Baker Chair of Insurance at Missouri State University. 

The above article is reprinted from the June 2010 edition of Risk Management Magazine.